Section 4 of the Partnership Act, 1932 reads “Partnership” is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons, who have entered into partnership with one another are called individually “Partners” and collectively “a firm”, and the firm name, under which their business is carried on, is called the “firm-name”.
Partnership – Has no legal personality of its own
Section 4 of the Act makes it amply clear that Partnership is a relationship between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A Firm is a collective name give to the partners who have entered into partnership. There are a plethora of cases in which various courts have held that “Partnership firm has no legal personality of its own”. The Supreme court in the case of Malabar Fisheries Co. Vs. Commissioner of Income-tax, Kerala1 held that “The position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, ‘ 1932 is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm”
The Indian Act, like the English Act, avoids making firm a corporate body enjoying the right of perpetual succession.
The Supreme court in the case of Third Income Tax Officer, Circle-I, Salem and Another Vs. Arunagiri Chettiar2 quoted with approval the following observation of the court in Malabar Fisheries (supra) “”a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm’s property or firm’s assets all that is meant is property or assets in which all partners have a joint or common interest”.The Status of a Partnership firm was stated in unambiguous terms in the case of Commissioner of Income-tax Vs. Sagar Mal Shambhoo Nath3 wherein it was observed “We find from a perusal of
1 AIR1980SC176, (1979)12CTR(SC)415, [1979]120ITR49(SC),
2AIR1996SC2160, [1996]220ITR232(SC), 1996(4)SCALE501, (1996)9SCC33, [1996]Supp2SCR461
3 (2006)203CTR(All)167, [2008]296ITR440(All)
the aforementioned provisions of the Partnership Act that the “partnership” has not been invested with the status of a “person” in law. This is what was observed by the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income Tax4and the relevant portion of the judgment is quoted below:
Nevertheless, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or ‘person’ in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute that firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.
a`Partnership has been held by different courts at different points in time to be a relationship between persons. The Partnership Act does not vest partnership with a separate legal entity status. Partnership –A separate legal entity for the purpose of taxation.
Section 2(31) of the Income Tax Act, 1961 Act defines a “person” to include an individual, a
Hindu undivided family, a company, a firm, an association of persons or a body of individuals whether incorporated or not, a local authority and every artificial juridical person, not falling within any of the aforesaid.
The above definition encompasses a partnership firm and vests on it the status of a distinct legal entity. A partnership firm for the limited purpose of taxation is to be considered a separate legal entity. This view has been substantiated by the Supreme Court in the case of Rao Bahadur Ravulu Subba Rao v. CIT 5which is as follows:
“But, as pointed out by this Court in Dulichand Laxminarayan v. Commissioner of Income Tax, Nagpur, in loads have been made by statutes into this conception and firms have been regarded as distinct entities for the purpose of those statutes. One of those statutes is the Indian Income Tax Act, which treats the firm as a unit for purposes of taxation. Thus under Section 3 of the Act the charge is imposed on the total income of a firm, the partners as such being out of the picture and accordingly under Section 23 of the Act, the assessment will be on the firm on its total profits”.
The above view reaffirmed by the Allahabad High Court in the case of Commissioner of Income-tax Vs.Sagar Mal Shambhoo Nath
4 [1956]29ITR535(SC)
The Supreme court in the case of Commissioner of Income Tax v. A. W. Figgies & Co. 6, the Supreme Court held as follows:
“it true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A ” partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firry’s name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person or quasi corporation. But under the Income Tax Act the position is somewhat different, A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually.
Section 3 which is the charging section is in these terms:
Where any Central Act enacts that Income Tax shall be charged for any year at any rates…tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority and of ‘every firm’ and other association of persons or ‘the partners of the firm’ or the members of the association individually,
The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct 1 unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of a partnership under English law or Indian law, cannot be taken in applying the law of Income Tax”. The Allahabad High Court in the case of Commissioner of Income-tax Vs.Sagar Mal Shambhoo Nath observed that “when a special provision is made in the Income Tax Act
which is contrary to the provisions of the Partnership Act then effect has to be given to the provisions of the Income Tax Act and resort cannot be taken to the provisions of the
Partnership Act. This observation of the court was made on the basis of the principle enunciated by the Supreme court in the case of Rao Bahadur(supra) wherein it was observed “The Act is, as stated in the preamble, one to consolidate and amend the law relating to Income Tax. The rule of construction to be applied to such a statute is thus stated by Lord Herschell in Bank of England v. Vagliano [1891] AC 107
I think the proper course is, in the first instance, to examine the language of the statute and to ask what is its natural meaning, uninfluenced by any considerations derived from the previous state of the law and not to start with inquiring how the law previously stood and then, assuming that it was probably intended to leave it unaltered.
We must, therefore, construe the provisions of the Indian Income Tax Act as forming a Code complete in itself and exhaustive of the matters dealt with therein and ascertain what their true scope is…. To sum up the Indian Income Tax Act is a self-contained code exhaustive of the matters dealt with therein and its provisions show an intention to depart from the common rule, qui facit per alium facit per se”.
The law as regards the treatment of partnership under the Partnership Act and the Income tax Act is quite clear from the above cited case laws. Therefore, it would only be prudent to conclude that partnership firm is not a separate legal entity, save for the limited purpose of assessment under the Income Tax Act.